Faster credit growth than GDP signals central banks to act

MUMBAI: When bank lending (credit) grows faster than the GDP over a certain period, it is a signal for central banks to tighten monetary policy, a top official of Fitch Ratings said.

"If, over a certain period, credit grows faster than GDP, central banks should ask banks to set aside more reserves to prevent the kind of problems being witnessed now in the developed economies," Fitch Ratings' Managing Director, Financial Institutions, Asia-Pacific, David Marshall, said here.

During an economic boom, central banks should raise capital adequacy norms and discourage banks from aggressive lending, Marshall said, adding that this is the single-most important lesson learnt from the financial meltdown that led to the collapse of banks in the US.

"Discouraging aggressive lending will also help prevent over-heating in the economy," he said.

During a downswing, raising capital will be expensive and hence, setting aside reserves during a boom would prove advantageous to banks, the Fitch official said.

Banks in Asia including India were in relatively good shape because of the conservative attitude of central banks, he said.

"In Asia, problems are due to external shocks and not due to domestic weaknesses," Marshall said.